3/05/2009 @ 12:25PM

'Grandpa Wen' Vows To Reach 8% Growth

Chinas Premier Wen Jiabao on Thursday vowed to use a record-high budget deficit as a tool to help the Chinese economy achieve its 8% economic expansion goal this year. But the leading comrade did not announce any new stimulus package, as had been widely anticipated, to substantiate the all-important growth target.

In his annual report on Thursday to the National Peoples Congress, the parliament’s annual session, Wen pledged that the 2009 growth goal was realistic despite a deepening global financial crisis. It needs to be stressed that in projecting the GDP growth target at 8 percent, we have taken into consideration both our need and ability to sustain development in China, he said.

As long as we adopt the right policies and appropriate measures and implement them effectively, we will be able to achieve this target, he added.

To cushion the impact of the global downturn, Wen announced a fiscal deficit budget of 950.0 billion yuan ($138.9 billion) for 2009, a record high in the six decades since the Communist Party took control of China. It was nearly three times the previous record deficit of 319.8 billion yuan, in 2003, according to the official Xinhua news agency.

Besides government spending, Wen said the government would use tax incentives to support exports. He also set an ambitious target of 5 trillion yuan ($730.5 billion) in new lending this year, above last year’s level, to help credit-starved Chinese enterprises weather the business cycle.

Nonetheless, the premier did not announce any new stimulus package, disappointing Chinese investors who had hoped that Beijing would come up with additional spending measures to turn around the slowing economy.

Analysts had been speculating that Beijing would increase government expenditure on infrastructure and manufacturing beyond what is called for in the 4 trillion yuan stimulus package ($584.1 billion) that it unveiled in November. The package was expected to be expanded to 6 trillion yuan ($877.8 billion) or conceivably as much as 10 trillion yuan ($1.5 trillion). (See “China Primes The Pump, Again.”)

Chinese stocks came well off their early highs on Thursday after Wens morning speech and closed just 1.0% higher, at 2,221.08, following a 6.2% rally on Wednesday.

Wen admitted that China is facing unprecedented difficulties and challenges because of the worldwide financial crisis. Demand continues to shrink on international markets; the trend toward global deflation is obvious; and trade protectionism is resurging. The external economic environment has become more serious, and uncertainties have increased significantly.

In a country of more than 1.3 billion people, with majority illiterate, employment stability is a paramount concern for Beijing. Officials estimate that about 20 million migrant workers have already lost their jobs as export-dependent factories closed down and construction sites were left idle. Wen said his government would seek to head off social unrest: We will improve the early warning system for social stability to actively prevent and properly handle all types of mass incidents,’ he said, using the government’s euphemism for riots, protests and demonstrations.

In a research note released after Wens address, Frank Gong, an analyst with JPMorgan, argued that, to sustain the current recovery in China, further stimulating domestic consumption and squelching expectations of deflation hold the key, since external demand for Chinese exports has yet to see the worst levels of the current downturn. However, in our view, policymakers appear to be satisfied with the recent initial (yet still quite fragile, in our view) recovery in the economy, Gong said.

On the monetary policy front, JP Morgan said deflation is a prominent risk for China in the near to medium term. The brokerage expected to see more rate cuts and easing of banks’ reserve ratio requirement down the road. Nonetheless, the 4% CPI inflation target for 2009 as laid out in today’s report [against JPMorgan's forecast of 0.1%] suggests that the authorities might be too complacent about the deflation risks, Gong added.